Innovation economy has become the locomotive for economic growth, which intensifies the competition for technological advantages. Right holders are facing hot issues of how to protect trade secrets in a reasonable and efficient manner, and how to recover after one’s secret information has been misappropriated. On February 26, the Supreme People’s Court ruled on the appeal of the dispute regarding the technological secret of producing vanillin between Jiaxing Zhonghua Chemical etc. and Wanglong Corporation etc. The Court awarded the plaintiff, owner of the secret, 159 million CNY, which is the highest amount of damage ever awarded in a trade secret misappropriation case in China. The case drew wide attention, and on April 13the Patent and Innovation Committee (PIC) of QBPC invited Fairsky Law Office partner Zhang Qiulin, who represented the right holder on the case, to share with members his thoughts and insights at a PIC luncheon. Committee Vice Chair Simon Xia moderated the luncheon, Chair Alvin Deng, Vice Chairs Frank Liu and Wang Dazhi, and more than 60 member representatives participated.
Qiulin explained the facts of the vanillin case in details, and introduced how the right holder collected and organized the evidence, the proceeding of the trial, and the highlights of the case. The revision of the Anti-Unfair Competition Law significantly eases the right holder’s burden of proof, which is showcased in this case. Article 32 of the law stipulates that the burden of proof shifts to the infringer after the right holder produces prima facie evidence to show that the information is trade secret and that it has been misappropriated. In this case, based on the equipment names listed on the defendants’ purchase agreements and environmental impact report, the right holder inferred that the defendant used 9 equipment drawings that were illegally acquired. The defendant, on the other hand, provided no evidence to support the claim that they came up with these drawings on their own. They offered no evidence to explain the minor alterations in the drawings either. The defendant thus did not satisfy its burden of proof and during the appeal, the court accepted the plaintiff’s inference.
Using economic analysis report to show price erosion helped the right holder receive its high award. Price erosion is the phenomenon where the infringer competes with the right holder, not only taking away the market share but also forcing the right holder to lower its price to stay competitive. In this case, by separating factors that are unrelated to the infringement and choosing the most fit regression model, the economic analysis report showed that price erosion alone cost the right holder 790 million CNY. After the right holder supplemented sales accounts, receipts, and other objective evidence, the court chose gross profit as the method to calculate damages. In this way of calculation, the damage was higher than the operating profit but lower than the damages caused by price erosion.
The case also establishes the principle that the principal agent is jointly liable if his company has been formed to infringe upon other’s rights. The principal agent of the defendant directly got involved in the infringement operation, bribing the plaintiff’s employees and transferring the secret information himself. After analyzing the defendant’s activities after formation, such as production line construction and product delivery, the court determined that the defendant was formed specifically for the purpose of using the technology secret stolen from the plaintiff to produce vanillin. The company was merely a tool for its principal agent to carry out the infringement. The infringing activity at the core of this case represented both the will of the company and the will of its agent. They must share the liabilities.
At the end of the meeting, Zhang Qiulin answered members’ questions. For right holders, the key issue in trade secret litigations was to collect and present the prima facie evidence required by Article 32. Especially in cases involving an former employee that had not actually used the stolen secret yet, it remained difficult to show misappropriation and damages. Meanwhile the participants also discussed issues including evidence collection methods and their legitimacy, shift of burden of proof, connecting the civil and criminal proceedings, and punitive damages.